Shasun Pharma: In Great Health

Its UK business operations are termed as Shasun Pharma Solutions Limited (SPSL) and it came into being through the acquisition of Rhodia Pharma Solutions in 2006. The business operations were consolidated in FY09.

Business Operations

The company has two main business segments, namely API (active pharma ingredients) and formulations. The API business adds about 55 per cent to the topline while the rest i.e. 45 per cent is added by the CRAMS business. Its API product pipeline includes products like Ibuprofen, Ranitidine, Nizatidine, Gabapentin, etc.  Ibuprofen and its derivatives make for the largest product group of the company and add about 24 per cent revenue to the topline. The company intends to keep its volume-based growth in the API segment and also plans to add more products in the API segment.

Shasun currently has two API facilities located in Pondicherry and Cuddalore. The company also plans to invest in new facilities since it wishes to launch three new APIs in FY14 which are expected to give them higher revenue opportunities. Besides, the company is also investing in its Vizag SEZ facility for APIs that will help to increase the volumes.

The CRAMs business constitutes of two business segments, namely API CRAMs and formulation CRAMs. API CRAMs includes a facility in Dudley (UK) and at Pondicherry in India. In the UK, SPSL had a total of 28 products in FY12 with a pre-launch pipeline of 24 new products. The Dudley facility in the UK has recently won GBP 4,00,000 grant from the UK government for investment. Using this grant the company has invested Rs 16 crore in the plant to build more technologies.

In the formulation CRAMs segment the company has finished a dosages’ facility which caters to both generic and innovator companies. The company has regulatory approval for this site from USFDA, UKMHRA and TPD Health Canada. This facility has also received WHO approval and will see rise in volumes as it is looking to expand the business in emerging countries as well. Besides, the current capacity of 5 billion tablets is currently being fully utilised which means it will need to be expanded soon. We remain optimistic about this business as there is an increasing demand for finished dosages due to the rise in the generic drugs worldwide. 

Besides these two major segments the company also has another segment in the biotech sphere which currently has negligible revenues. This segment focuses on improving production efficiencies, biosimilars, etc. SPL has formed a joint venture in the nanotechnology business and the drugs in this business are currently going through pre-clinical trials.

Focus On Brands

Shasun has also recently announced its own brands in cardiology and diabetes management which are the two growing therapeutic segments in the Indian pharmaceutical sector. The brand ‘Warfen’ is anti-coagulant while ‘Glimsen’ is prescribed for Type 2 diabetes and ‘Lifokinase’ is a cardiac brand.  Shasun also intents to launch drugs in various other therapeutic segments like gastroenterology, cardiology, diabetes, nephrology and oncology. It also has many products under registration in several countries which will provide good growth opportunities.

Financial Performance

The business saw 8 per cent decline in revenues in FY09 due to the consolidation of the UK facility. In the same year it also posted loss of Rs 137 crore due to the adverse currency fluctuations. However, in the last four years its revenues have grown by a CAGR of 7 per cent. The EBITDA has grown by 24 per cent, indicating higher widening margins. Besides, its net profit has also grown by 42 per cent, indicating that at the net level company has been able to improve its performance.

As on March 31, 2012 the company had a long-term debt of Rs 77 crore and a total debt of Rs 100 crore. This yields a debt to equity ratio of 1.3x. The interest cover ratio of 2.8x is also comfortable. The company is also consistent in its dividend payments except for FY09 when it incurred losses. The R&D expenses have been between 2-4 per cent in the last six years. The development work on ANDAs is going on with a goal to add about five ANDAs in the U.S. markets in FY13.

In FY12 the company achieved sales of Rs 1,000 crore for the first time in its history. It is now targeting sales of Rs 2,000 crore by FY15 (three-year CAGR of 26 per cent). The capacity expansions, positive outlook for finished dosage business and high volumes in the API business will be the key drivers for the company.

Recommendation

On the valuation front, the stock is currently trading at a PE multiple of 6x of its FY12 earnings which is quite less compared to its peers. On an EV/EBITDA basis the stock is trading at a multiple of 4.6x, which is still lower compared to most of the growing pharma companies. Though the stock has surged, we still see a buying opportunity and therefore investors could accumulate the stock with the expectation that it will yield about 40 per cent price appreciation in the next two years.